Irrational cooperation between Ukraine and the IMF

IMF is not a bank for reconstruction and development to be interested in the development of our infrastructure or new profitable projects. This is a club of external creditors, and its main task is to protect their interests

The issue of cooperation between Ukraine and the International Monetary Fund (IMF) is increasingly losing its original economic meaning and acquires a certain sacred symbol for our country. It is a kind of a financial prototype of a cargo cult in Ukraine. Cargo cult means worshiping American aircraft, from which humanitarian supplies were dropped to the Aboriginal Melanesians during the Second World War. But the war was over, and the natives continued to wait for the Heavenly Gifts. Melanesians seemed to be doing everything right: they lined up on the runway, the most advanced of them portrayed "dispatchers" with bamboo sticks instead of antennas, but the "heavenly bird" did not fly.

A plethora of tough "IMF-fans" has appeared in Ukraine. They do their shaman tricks in anticipation of the "credit" rain, they beat the tambourine, but for some reason, the money does not appear. Rational economic thinking of our ministers and functionaries of the National Bank of Ukraine (NBU) is completely and irrevocably superseded by irrational "magic thinking", designed for the mystical world of good western spirits. And will necessarily fly again. With money. Even if another "son of a bitch" should be sacrificed for this.

As Sigmund Freud put it in his work "Totem and Taboo," "a primitive person has tremendous confidence in the power of his desires. Actually, everything he does magically must happen only because he wants it. This scheme works with our "primitive" officials: they are firmly convinced that the IMF will continue to lend to Ukraine. As well as the rest of the Western world. Simply because we are a "European shaft" from the eastern hordes, and we really want this.

Famous science fiction writer Arthur C. Clarke has formed three laws, one of which was somewhat modified by Isaac Asimov: when laymen rally around an idea denied by respected but older scientists and support this idea with fervor and enthusiasm, this respected, but the elderly scientist is probably right. Unfortunately, there are practically no respected, older scientists left in Ukraine (the "reforms" of recent years have affected the situation), but this famous "Clarke Law" in Ukrainian realities could be formulated approximately like this: when laymen rally around some idea and support this idea with fervor and enthusiasm, they are not right. Something similar happened in recent years when "professionals" rallied around the idea of eternal cooperation with the IMF.

In the course of cooperation with Ukraine, the IMF has also learned the bad manners and moved from rational to irrational requirements. As the epistolary correspondence of recent years shows, the fund has finally lost faith in the ability of Ukrainian partners to carry out effective and rapid reforms. The key word here is "effective". The cooperation between Ukraine and the IMF lasts for many years, but any new program, like in the well-known film "Groundhog Day", begins again with an alarm bell and a cheerful song on the radio, that is, from the zero mark - "the beginning of economic reforms." Paradoxically, all those piles of legislative papers, adopted at the request of the fund by Ukrainian deputies, did not bring us a step closer to the finish of the "reforms". Apparently, the old "Soviet" leaven reveals a well-known principle: the reforms have a beginning but they have no end. Like the song says, Ukrainians look like noble savages in the eyes of the international creditors. Following the logic of the song, the situation will change for the better only if the "calendar" is canceled. What a bad luck: who will sign the memorandum with the IMF then?

The fund has also decided to act in an irrational field and rudely miscalculated. But competing with our officials in this business is like catching mice in a dark room. That is why such demands as the creation of the Anti-Corruption Court, the selection of judges and the fight against corruption are the same as demanding bees to voluntarily give honey. We cannot even imagine that in our realities the judges decide to arrest the perpetrators, for example, the NBU's functionary; even Arthur Clark would not imagine this.

All the today's fuss in the relations between Ukraine and the IMF works like the old good scientific research institute of the Soviet period: you pretend that you are lending money, and we pretend that we are carrying out reforms.

Although the NBU is threatening Ukrainians, that without new tranches of the fund, the hryvnia would be dead, these intimidations look rather naive. Firstly, the hryvnia is already dead. Secondly, IMF tranches enter the currency reserves of the National Bank, subject to strict monetary indicators, including foreign exchange reserves (FER), which are calculated as the difference between gross reserves and liabilities. That is, any NBU’s operations on the domestic market to maintain the hryvnia with the help of foreign exchange interventions will be carried out exclusively at the expense of our own resources (FER). And when the money from the FER would end, no one will spend the currency from the reserves (borrowed) market. Moreover, NBU has no desire to do it. NBU chairperson has recently said, "We do not know what the course will be." And if the National Bank does not want to strengthen the hryvnia, it does not matter if a new tranche comes to its reserves or not. However, there is a problem of payment of external debt in 2019-2020. But these amounts are so high that IMF tranches would not save us. This problem could be solved only in a complex way, but that is another story.

So is there any sense in this Ukraine-IMF cooperation? It is just like a famous joke: “Can you see the gopher? No? Neither can I. But he's here!”

The ambitious program of expanded financing of the EFF provided for the allocation of more than $ 17 billion for Ukraine over four years in twelve tranches. We had to get the biggest tranche in 2005 - 7.52 billion dollars. Then there was a pause to administer the results of the reforms, after which in 2017 a new portion - $ 5 billion should come. In the end, $ 2.9 billion should be allocated.

In order to implement this program, the IMF has even prematurely stopped the two-year stand-by program, according to which Ukraine received two tranches of $ 4.6 billion in 2014.

In fact, it was written smoothly only on paper. The harsh Ukrainian reality made its own corrections: under the EFF extended financing program, Ukraine received only $ 8.7 billion: $ 6.7 billion in 2015 (two tranches) and one billion in 2016 and 2017 (only four tranches). If we take into account also the stand-by program in 2014, we get $ 13.3 billion.

The amount seems to be sufficient for launching structural reforms in our country. Naturally, much more money would be required for their full realization, but instead of loans, Ukraine should attract investments (internal and external). The IMF loan is a kind of battery that should launch the starter of our economy.

But neither Ukraine’s starter, nor the motor work. Why? The answer to this question is quite simple. The IMF is not a bank for reconstruction and development and not an investor. It is not interested in the development of our infrastructure or the implementation of new profitable projects. This is a club of external creditors, and its main task is to protect their interests. And given that the holders of our debts are American venture funds, it is necessary to protect these interests at all costs.

In 2014-2015, Ukraine has received 11.3 billion dollars from the fund, while paying more than $ 15 billion on internal and external foreign currency obligations (direct guaranteed public debt and payment of the state companies, like Naftogaz).

There were other types of assistance and loans: from the EU (macro-financial assistance), Eurobonds (issued under US guarantees), loans and assistance from Germany, Canada, Japan, international banks. But all this money went for paying off the foreign debts. Ukraine was allowed to make only two "lyrical digression". I mean purchasing foreign natural gas at the expense of foreign loans. But this “relaxation” meets the interests of the Europeans because the “freezing” country would not provide a full transit.

So do not worry about the IMF and its tranches. They will turn back. Not is some twenty years, but in 2019-2020, when Ukraine will have to repay a significant part of the external debt. As the experience of Argentina shows, the fund can be frightened off only by a full-fledged default, when external creditors have nothing to take. That is the only way.